The 1000-Pip Opportunity for Traders That Understand ONE Thing
It’s been an interesting week in the markets. Certain trends are starting to gather steam and offering lots of promise for future profits.
What’s more, recent events have demonstrated that you simply must trade based on price action, not on the news. In fact, some of these trends have been declared “astonishing” by some of the country’s leading economists.
So let’s get started on the latest update, starting with this long-term chart of the USDI (US Dollar Index) which plots the US dollar against half a dozen of the major currency pairs.
I’ve referenced this chart many times before, but I think it's important to reinforce a historical perspective, especially in view of the price action that we've seen in the last couple of weeks.
Despite the fact that there’s been a 10-year run in the USDI, the dollar is still in a stealth bear market. Because if you look at the latest run in the context of the last 45 years, USDI remains within a long-term descending triangle.
Recent price action notwithstanding, that 10-year rally has stalled at a double top resistance level right at the long-term downtrend line of the triangle.
That’s why the current level has always represented an infection point and potential major reversal level.
This is especially important when you see how USDI trends last many years at a time. From 1975 to 1985 USDI rose and then from 1985 to 1995 it dropped. From 1995 to 2000 it rose again before falling for the next five years to 2010. The last 10 years have been another rise.
Going by this history, USDI looks set for another major drop that could take as many as 10 years to play out.
Now for a closer look with a weekly chart:
The double top evident on the 45-year chart is visible here. And recent price action suggests USDI has formed a bull trap where all the bulls who chased the recent rally got trapped above the breakout area before prices dropped back.
Now USDI has broken lower and has even pierced below its recent, small descending triangle.
This looks like a green light for the dollar to keep dropping, although there will be support areas (including the nearby uptrend line) where USDI could get jammed up for a while and even retrace a portion of its descent.
However, I think the dollar’s descent is all but assured.
It follows that if the US dollar is going lower then certain dollar pairs will go higher against a weaker dollar.
EURUSD (the Euro versus the US dollar) is certainly one of them, and that’s what we're seeing here.
After hitting a long-term bottom at 1.04 – 1.06, EURUSD couldn't push down any further. And when something can't go one way, it usually explodes in the other.
There’s potential resistance at the 1.15 level which might cause EURUSD to go sideways for a while, but EURUSD seems to have bottomed by now. I would use any dip as an opportunity to get long for the long-term.
This two-chart pair of USDI is why it's very important to look at the charts from a long-term perspective.
And now for another key point: it's one of my key philosophical principles that outlier events like the coronavirus pandemic push prices to where the markets were already heading, but at a faster pace than otherwise would have occurred.
AUDUSD (the Australian dollar versus the US dollar) is an excellent example of this phenomenon:
For many years I was very bearish on AUDUSD based on its long-term downtrend and its governing intermediate double top which acted as a continuation pattern for that downtrend.
What I mean by ‘continuation pattern’ is that the double top arrested a weak rally. Once AUDUSD went through the neckline of that pattern, it dropped lower and lower.
That’s why I expected AUDUSD would eventually pierce its long-term support at 0.67. While that “floor” held since 2015, the more you test a price level, the more likely it is to get taken out eventually.
That’s exactly what happened with the coronavirus panic. There were a lot of sell stops below 0.67 and they all got triggered at once. This took the market from 0.67 down to 0.55 in a hurry. Then it rebounded just as swiftly, all the way back to its downtrend line.
This price action created what looks like a bear trap where all the bears are trapped. It looks like AUDUSD is going higher thanks to US dollar weakness, now the only question is in what time timeframe.
For now, AUDUSD has hit resistance at 0.70 with even more resistance a bit higher at 0.72.
However, I think the bottom is in for AUDUSD. I don’t expect the 0.55 low to be taken out and that means the long-term trend is now up. AUDUSD might dip again, or just slide sideways for a while before making another determined run-up.
But the direction to bet is on the upside here, just as with EURUSD. I’ll be watching to see how it unfolds.
Here’s USDCAD (the US dollar versus the Canadian dollar) and this chart also confirms my anticipation that the US dollar is going to fall:
Note that this chart will drop on USD weakness as USD is the base currency in USDCAD (i.e. the first currency). Whereas with EURUSD and AUDUSD, the USD is in the quote currency position and the second position in those pairs. In forex, the first currency is always measured against the second one.
So USDCAD will drop on USD weakness while EURUSD and AUDUSD should rise for the same reason.
I strongly believe USDCAD is going to drop more. It’s forming a long-term double top at the 1.45 price level. This double top won't be confirmed until USDCAD pierces the neckline around 1.25. There’s another support at 1.30 before that neckline is reached.
But breaching either level (and especially both) will open up much lower prices. Note also that USDCAD has broken below its descending triangle pattern already.
So I think we can form a thesis that USDCAD will go lower over time, just like USDI. This pair is on a trajectory for the 1.30 level and below over time. Look at any allies in USDCAD as opportunities to get short.
Now I'm going to discuss the performance of the Japanese yen versus a number of currencies.
To start, here’s USDJPY (the US dollar versus the Japanese yen):
I've talked about this chart ad nauseum because my anticipation is that we're going to see lower prices in USDJPY over time.
However, this pair has caught some support in recent weeks and now we're left to surmise if this is going to be a sustainable rally. I'm still very much on the bear side because of previous price action and fakeouts to the upside where prices exhausted themselves.
Look at the recent H top for two examples of where prices rose dramatically and then collapsed just as dramatically the next week.
So while many traders are asking if USDJPY will go higher, I don’t think it will.
To consider the bullish case here’s the same chart but using a long-term symmetrical triangle as the main pattern:
There’s still space for USDJPY to run before you can make a case for a genuine breakout. If USDJPY starts taking out certain levels to the upside, that could “bust” both the descending and symmetrical triangles and indicate a long-term rally in the pair.
So far that hasn’t happened.
Now of course I remain open to the fact that my analysis could be incorrect. If so, I will go long at some level and throw in the towel on the bear scenario.
However, I will await that verdict it and when it comes. I still feel USDJPY’s current up move is going to be a fake-out and eventually USDJPY’s downside trend will resume.
The JPY has been weak in general recently, which is probably why it’s been drawing so much attention.
To examine this, here’s EURJPY (the Euro against the Japanese yen) on a monthly basis:
Note that each bar represents one month and the chart goes all the way back to 2006, making this a 14-year chart.
EURJPY is still in a long-term downtrend. That's not to say that there haven’t major rallies here and there, but this is still a secular downtrend. It's got a long way to go until it turns around.
I’m very open to the possibility that EURJPY may rally to its long-term trendline. So a move from 123 to 130 isn’t out of the question. But even if it happens, there’s still a downtrend in place.
I'm not against playing counter-trend moves, by the way. Especially if you get a move from 120 to 130 which is worth 1,000 pips! But I’m sitting on the sidelines for now, even though the previous month featured a bullish key reversal.
That’s because even though key reversals often point in the direction the market wants to take, I still feel this chart looks very heavy and ultimately will move to the downside.
For comparison purposes, here’s GBPJPY (the British pound versus the Japanese yen) over a similar timeframe:
This is a monthly chart and it’s pretty much the same discussion as with EURJPY in terms of a long-term downtrend bouncing off support.
Having said that, GBPJPY is coming off much stronger support at the 120 – 125 level, which might be enough for a major rally off the bottom. I think there's still room left on the upside, which is why I’m currently long from about 100 pips lower than you see on this chart.
I feel we could get back into the 142 – 145 level where GBPJPY would start bumping up against the trend line.
The daily chart of GBPJPY gives you a closer look at why I’m long this pair right now.
There are some formidable support patterns on the daily chart here.
Usually, I'm very quick to see these turnarounds on the daily charts and I should have taken more out of this one in particular based on what I’m seeing here. There’s an obvious double bottom a couple of months ago and then the bear trap which formed the first dip of the more recent double bottom.
GBPJPY has accelerated past the neckline of that double bottom and should go higher from here.
I remain long and am monitoring price action. My biggest mistake here was not being quick enough to pull the trigger earlier. I let my long-term bearishness influence me too much.
So hopefully this is a good lesson for both me and you to balance the long-term and short-term opportunities on price charts.
Now here’s GBPAUD (the British pound versus the Australian dollar):
Due to the strength, we’re seeing in the Australian dollar in AUDUSD, it’s no surprise that GBPAUD has been trending sharply lower.
I called this a long time ago because of the bearish implications of the long-term ascending broadening formation on the chart. This pattern starts out very narrow at the beginning and then broadens at the top. It usually acts as a reversal pattern.
So when I saw prices penetrate below the 1.96 level, I was confident GBPAUD was going to go a lot lower.
The target is the bottom of the ascending broadening formation and it looks like we have lots more to go on the downside here.
GBPAUD has already dropped 2,000 pips very, very quickly. That’s why we’re likely to see some kind of consolidation before the target is hit.
To get a better idea of how high GBPAUD might rise before a subsequent drop, it’s useful to re-draw the pattern on this chart as a double top within a head and shoulders:
GBPAUD recently broke the neckline of this pattern and that’s likely to be the high-water mark of any rally. Use any such rally to get short GBPAUD.
Now onto the precious metals …
Before I get into a discussion on silver and gold individually, I want to provide some perspective on the gold/silver ratio relationship shown in this chart:
You determine the gold/silver ratio by dividing the price of gold by the price of silver. Right now it’s around 97, which is down significantly from its all-time historic high of around 125.
A ratio of 120 means gold was trading at 125 times the price of silver at the peak of the coronavirus hysteria back in February and March. Since then the ratio has traced out a double top and dropped below the neckline of that pattern.
I feel this ratio will continue falling and should eventually return to its mean which was once around the 30 -50 area. The 90 level on the chart was a previous historic high and it should be penetrated in the near future.
I hope you understand that for the gold/silver ratio to fall, either the price of silver must accelerate relative to gold or the price of gold must fall relative to the price of silver.
At this point, I believe it's going to be the latter case: gold will start falling faster than silver.
Here’s XAGUSD (spot silver) and I've been saying for the last several months that silver remains in ‘prove it’ mode.
While there was a lot of excitement with the metals certainly with the goal going to multi-year highs. There was an expectation that silver was going to follow suit.
But for that to happen, silver has to start making new highs too. I was hopeful that silver was on its way to doing so last week, but we were burned. Once the price ascended to the upper part of the descending triangle, silver again put in a key reversal and killed the long trade.
Buyers took prices to an interim new high but by the end of the week, the sellers were in control. And this wasn’t the first time it’s happened. There have been earlier reversals, all of them acting together to block higher silver prices.
This latest reversal signifies that silver will likely stall out again and retreat into the choppy, sideways market we’ve seen for years.
Gold’s prospects look even less bullish, though. Here’s XAUUSD (spot gold):
I think gold has stalled and will likely accelerate to the downside after making multi-year highs just above $1,750 two weeks ago.
Gold went one step farther this past week by making an outside key reversal where prices went outside the high and low of the previous week only to close at the low.
That means the sellers are firmly in control.
And it means the gold/silver ratio is going to be important. It should give us an insight into future behavior. If the gold/silver ratio has peaked, then it’s most likely the ratio will continue to drop via a lower gold price relative to silver.
It's possible that gold can keep rising at a lesser rate relative to silver, of course. Nothing is ever for certain in the markets. But based on gold’s outside key reversal pointing the way lower, the price action looks very bearish. Gold may retrace all the way back to its initial breakout area.
Some observers will say this is inconsistent with the view that the dollar looks like it's going lower too. But correlations can get out of whack. Just look at price action and see what it tells you.
I think this recent outside key reversal warrants a short position in gold, so try and get short on a rally. Otherwise, place a sell stop under last week's lows.
Now before I share my analysis of the US stock market, I want to show you a quick screenshot of this article headline:
As it says, economists are “astonished” by the jobs report surprise. I’m showing you this to drive home the point that you can’t go by the experts, the news, or what people are saying in internet forums.
The market is a discounting mechanism. The market is ahead of the news. This is why looking at the news is basically useless. It will not only not help you in your trading, it will point you in the wrong direction.
Despite all the doom and gloom in the news, the NASDAQ made a new high:
That's what the markets do. In their infinite wisdom, they’re ahead of the information and ahead of the news.
The NASDAQ made an all-time new high against the backdrop of some of the worst economic statistics we've ever seen in US history. That includes the worst unemployment since the Great Depression (or even worse), the worst anticipated GDP declines on record, and so on.
Now I do feel this market has gotten ahead of itself. It’s at nosebleed levels and typically whenever a market returns to an area where it experienced a major sell-off, it doesn't go through like a knife through butter.
So I would not chase these prices. I don't expect a steep decline, but the market will likely pause in the near future. I will certainly be monitoring the situation to look for opportunities.
In the meantime, I’m bearish on the US dollar and gold, optimistic about a continued rally in GBPJPY, and sitting on the sidelines for most everything else.
I wish you a very healthy and prosperous trading week.
Mark "GoldTellSign" Shawzin